Whether you’re going to buy a new house, or refinance your current mortgage, here are a list of things you can do now that will not only get you approved for your new mortgage but will help you score the best interest rate, boost your credit score, and if you’re like most of us, get you on the road to being debt free in no time:
#1 – Fix any errors on your credit report now. Most credit reports have a number of errors on them so get a free copy of yours from all three credit bureaus (some creditors, like a fitness membership, for example, only report to one of three bureaus so it’s important to get yours from all three — Equifax, Trans Union and Experian) at http://www.annualcreditreport.com and have them fix any errors you find. It will take 30 – 45 days for the errors to be corrected and/or removed but this alone will improve your credit score.
#2 – Find out what your credit score is. Since your credit score is a huge determining factor in whether or not a mortgage company will give you a loan, it pays to know what your score is ahead of time. Lenders know each credit bureau will give you a different credit score so they use the score in the middle as your credit score. That means if Equifax says it’s an 804, Trans Union says it’s a 795, and Experian says it’s an 815, the lender will use the 804. Be sure to get your credit score from each bureau when you request copies of your credit reports. (Experian charges $5.95, Equifax $7.95 and Trans Union $14.95)
#3 – Pay all your bills on time. Lenders don’t want to see any late payments, especially on your current mortgage or rent, so make sure you pay your bills on time. Plus, every 30-day late takes points off your credit score.
#4 – Know your budget. Sit down with your checkbook and come up with a monthly budget that includes all your expenditures. Don’t leave anything out – groceries, dry cleaning, childcare, entertainment, etc. For most of us, this is an eye-opening experience. You’ll need this for #5 and #6 below.
#5 – Pay off as many accounts as you can. Your mortgage lender is going to be looking at your debt-to-income ratio (the monthly debts that appear on your credit report divided by your gross monthly income) and a high DTI can keep you from qualifying. Start with the account with lowest balance, such as a department store or gasoline charge card, and pay it off, then pay off the account with the next lowest balance. You’ll not only improve your DTI (and your credit score!) quickly, but you’ll be debt free in no time.
#6 – Don’t apply for any new lines of credit or make any large purchases until after you close on your new mortgage. Your credit score is partly based on how long you’ve been paying on your accounts, and each new line of credit you open takes points off your credit score. Plus, if you already have a high DTI, a large purchase will make it even higher and can keep you from qualifying for your new mortgage.
#7 – Start saving. Lenders decide to approve a loan and at what interest rate based on a person’s credit risk, and someone who pays their bills on time, has a low DTI, and stashes money away in the bank on a regular basis is a low credit risk. If you can, start stashing money out of every paycheck into a savings account, money market account, or a 401(k).
#8 – Don’t quit your job or start a business. Lenders want to see that you’ve had steady income for the last 2 years so wait until after you close on your new loan before you change jobs or open your own business.
#9 – Know your long-range goals. What’s going to happen within the next 5 – 10 years? Having a baby? Sending a child to college? Planning an early retirement? Selling the house? Know what your plans are so your lender can help you find the right mortgage program to fit your long-term financial goals.
#10 – Gather your records. When you’re ready to apply for your new mortgage, your lender is going to need copies of your:
- driver’s license(s) and social security card(s) (under the Patriot Act, they must have these) or for new residents from other countries, a copy of your Visa(s), • pay stubs covering the past 30 days,
- W-2s for the last 2 years (for self-employed individuals, copies of all pages of your income tax returns for the past 2 years),
- 2 month’s statements from your bank for checking, savings, 401k, IRAs, etc.